Small and Medium-Sized eCommerce Businesses Confident in 2006

Bainbridge Island, Washington – (The Hosting News) – January 5, 2006 – Online sales tax consultants to small and medium sized businesses, Avalara, has recently completed a survey of 12,000 small and mid-sized business (SMB) owners and operators who are active in e-commerce.

The results reflect a high degree of confidence in the economy among SMB-market owners and operators who are coming off a year of solidly improving performance. The study, found that these SMB owners and operators expect an even better year in 2006, and project more growth for e-commerce and on demand web services. These findings apply to both e-commerce and in their overall business, with e-commerce projected to outperform traditional retail sales.

The study also looked at SMB attitudes toward their increasingly significant role as involuntary sales tax collectors – especially with regard to Internet sales tax. This wide-ranging survey also examined SMB use of (and attitudes toward) web-based on demand services. The survey also projected that consumers’ e-commerce willingness to buy online, in spite of identity theft concerns – is expected to expand in 2006

Survey Findings

The Overall U.S. Economy

Seventy-Four percent of respondents to Avalara’s web-based survey feel that America’s economy was strong in 2005, and 72 percent think that the U.S. economy in 2006 will be better than 2005. In spite of a rising prime rate and other economic factors, just 19 percent feel that the U.S. economy did not do better in 2005, and 15 percent do not see further improvements in 2006.

SMB business owners and operators rated their own businesses — they were more upbeat about their own performance than they were about the national economy. Of those who took Avalara’s survey, 84 percent say that their own business did better in 2005 than it did in 2004, and an equal number saw their business again improving in 2006 over 2005. Only 12 percent felt their own business did not improve in 2005, and a remarkably small seven percent do not feel their business will improve in 2006. These findings reflect an impressively high degree of confidence in the economy among SMB-market owners and operators.

This confidence is also reflected in other national surveys of business and investor confidence levels. For instance, Scott Rasmussen of polling firm Rasmussen Reports reported in late December that the polling firm’s current investor confidence rating of 145.9 was the highest in 17 months, adding it was only five points off the firm’s highest-ever rating. The Rasmussen Report also found that thirty-seven percent (37 percent) of Americans rate the U.S. economy as good or excellent, up from 33 percent a year ago.

The U.S. E-commerce Economy

Reflecting an even stronger performance for the nation’s e-commerce economy than for the overall economy, the survey sample projects sustained growth in e-commerce through at least 2006.

In all, 90 percent of the SMB owners and operators who responded to Avalara’s survey, and who are engaged in e-commerce themselves, think that the U.S. Internet-based e-commerce economy was strong in 2005, and that same number — 90 percent — anticipates that the U.S. e-commerce economy in 2006 will perform better than it did in 2005. Only three percent felt that 2005 was not as strong as 2004, and just four percent expect 2006 to under-perform 2005.

Avalara also asked SMB business owners and operators to rate their own businesses, and found that those engaged in e-commerce were also upbeat about their own e-commerce performance. Of those who took our survey, 83 percent say that their business’s e-commerce operations did better in 2005 than it did in 2004. This response was virtually identical to their answers about their business’s overall performance. To that question, 84 percent said their overall business — both on- and off-line — had done better in 2005 than in 2004.

A statistically equal number — 81 percent — saw their e-commerce business again improving in 2006 over 2005, while 84 percent of respondents said that their overall business would improve in 2006. Just four percent of those engaged in e-commerce did not expect their e-commerce sales in 2005 to outperform those of 2004, and only five percent expected to do less well in e-commerce in 2006 than in the year just completed.

E-Commerce Comfort Zone

According to Avalara Chairman and CEO Jared Vogt, ”In part, this expected growth is coupled to a perceived growth in business and consumer confidence in the Internet — and in e-commerce. Of those respondents who are engaged in e-commerce themselves, 79 percent reported expecting that consumers ‘comfort zone’ — their willingness to buy online, in spite of identity theft concerns — would grow stronger in 2006 than it had been in 2005. Only eight percent felt that this comfort zone would shrink in 2006. These measures, taken together, form a strong indicator of continued confidence in the overall U.S. economy — and especially in the country’s Internet and e-commerce economy.”

”Since we serve our clients on demand, on a per-transaction basis, both of these are significant for our company,” Mr. Vogt added. ”Avalara’s growth had been dramatic in 2005 — the Company has grown from little more than a visionary start-up a year ago into a company that had more than 1,500 licensed users at the end of 2005.”

Internet Sales Tax and SMBs

The study also looked at SMB owners’ attitudes towards sales tax — especially Internet sales tax. In 2005, 42 percent of those SMB-market businesses engaged in e-commerce saw an increase in their role as involuntary tax collectors, while an equal number — also 42 percent — saw no increase in sales tax collections activity in 2005 over 2004. However, for 2006, 47 percent expect to see a measured growth in their role as e-commerce sales tax collectors, while only 36 percent expect no change in 2006 over 2005.

“Part of this reflects the initial awareness of the recently enacted state-by-state Streamlined Sales Tax Program (SSTP),” said Rory Rawlings, CPA, Avalara’s founder and Chief Tax Automation Officer. “However, part of this increased sales tax collections activity merely reflects the states’ more aggressive tax auditing and collecting efforts, which have been ramping up in recent years as states scramble for a piece of what some estimate is a $20 billion dollar sales tax windfall.”

The Onus of Collecting Internet Sales Tax

Avalara’s survey found that, on at least one sales tax-related point, there was broad agreement. Collecting sales tax is seen as an unwelcome operating cost or other problem by 72 percent of SMB-market business owners — just 21 percent had no issue with collecting sales taxes, either on-line or off-line. This problem can manifest itself in several ways. For instance, 39 percent of those responding said that the cost of collecting sales tax impacted their hiring plans in 2005, or was expected to do so in 2006. While collecting out-of-state sales tax is no big problem for large businesses — which can afford to staff sales tax collections departments that keep up with the 8,000 sales tax jurisdictions — and the more than 1,000 rate changes states and local jurisdictions impose each year.

“Keeping up with the constant change and thousands of taxing jurisdictions can be a major burden for smaller businesses,” Mr. Vogt explained.

“We were not surprised to see the market expecting an increase in online sales tax collections — clearly, the implementation of the SSTP program is already having an impact — nor were we surprised to learn that e-commerce businesses are not eager to take up the role of de facto state tax collectors, though most seem to be resigned to doing so,” Mr. Rawlings added.

The Internet Sales Tax Solution

Even though 72 percent objected to the role of collecting sales tax, 57 percent see it as an acceptable — perhaps “inevitable” — cost of doing business. However, 37 percent do not — and while the study didn’t break this down, Vogt suspects that those who objected were either from e-commerce businesses that had not routinely collected sales taxes before, or they were from businesses that had recently undergone a grueling state sales tax audit.

“Avalara was born out of the experiences of companies which had run into the buzz-saw of state sales tax audits,” Vogt said. “Because of the business service we offer — online, on-demand sales tax calculations that integrates seamlessly with the industry’s leading SMB accounting software packages — we were gratified to learn that 63 percent of those responding think that their sales tax calculations problems can be solved within their accounting software packages,” Mr. Vogt observed. “More than a dozen leading SMB accounting software packages ranging from QuickBooks to Microsoft’s Great Plains — access our sales tax calculator online, in real time, and run the calculations seamlessly, behind the scenes. Instead of performing a complex calculation, the end-user just types in ‘Avalara’ in their accounting package’s sales tax box and they instantly see the solution. Because we’re an on-demand service instead of a software product sales company, our sales tax calculations always reflect the latest regulations and the up-to-the-minute sales tax rate for any customer’s location.”

On-Demand Web-Based Services

The survey also explored SMB owners’ experience with, and attitudes towards, on-demand web-based services. Seventy-nine percent of respondents rated themselves as familiar with on-demand web services, while 15 percent say they’re not familiar with that relatively new way of delivering alternatives to conventional software. A bare majority — 52 percent have used — or are using — on-demand web-based services; 38 percent of respondents have not. However, 64 percent expect to be using on-demand services within the next six to 12 months, while only 15 percent say they won’t be using those services. That 15 percent number is the same as the number of those who are unfamiliar with on-demand services.

“On-demand services are increasingly accepted in the SMB marketplace,” Avalara’s Chairman and CEO, Jared Vogt, said. “The model we’ve adopted for delivering our sales tax calculation service is clearly part of a major trend in the way that smaller businesses obtain digital services — and the conversion from conventional software to on-demand web-based services is gaining momentum.”

Initial skepticism of the on-demand model also seems to be dying off. Only 15 percent of respondents think that on-demand services are “all hype and marketing buzz,” while 57 percent disagreed with that characterization. A full 30 percent of those who responded were undecided on the issue — that’s the highest “don’t know” figure in the study, a clear indication that previous negative or skeptical attitudes toward on-demand services are in a state of rapid flux.

Initially, we created custom sales tax calculations software packages for individual firms. However, after creating four increasingly sophisticated solutions for specific companies, we realized that the need was general — we converted our complex, field-tested software into a web-based, on-demand sales tax calculating service that any SMB-market business can access in real time for just pennies per transaction.

Avalara commissioned this wide-ranging survey, which was designed to look at SMB-market business e-commerce performance in 2005 — and to anticipate e-commerce performance in 2006.

“Because Avalara is the only SMB-focused sales tax calculation service, that delivers our services, on demand, over the Internet we need to know how these trends impact their businesses,” Avalara’s Chairman and CEO Jared Vogt explained.

The Avalara survey was conducted during the last half of November, using research tools provided by Zoomerang.com. “Because we provide our services in a web-based, on-demand environment,” Vogt said, “we chose to conduct our survey online as well.” Avalara’s survey used a contact base of more than 12,000 opt-in registered SMB-market business owners and operators.